The Corporate Tax Game

Graham Bowley

Friday, 3 May 2013 | 12:52 PM ETThe New York Times

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James Best Jr. | New York Times

Republicans and Democrats in Washington rarely agree on anything these days. But in recent months almost everyone seems to have coalesced around the notion that the corporate tax system is broken and needs to be fixed.

President Obama is for it. So are the two leaders of the tax-writing committees in Congress: the House Ways and Means chairman, Dave Camp, a Republican, and Max Baucus, the Democratic chairman of the Senate Finance Committee, who plans to retire next year and may be seeking a capstone for his career. The country's biggest companies have declared loudly that they are in favor of revising the nation's business tax system, too.

Despite the widespread support, the campaign for an overhaul is exposing deep fault lines within the business world that suggest it may fall apart. The problem is how to pay for everything lawmakers and businesses want without adding to the deficit.

The main goal of the advocates on both sides of the aisle is to lower the official corporate top rate from 35 percent, the highest among industrialized nations. Republican leaders and a large number of giant companies also want to end what they regard as the noxious practice of taxing the profits that multinational corporations earn abroad. The United States is one of the few countries to do so.

The only way to tackle such goals without losing revenue, however, is to close specific corporate tax preferences intended to promote various activities considered worthwhile by their supporters. There is plenty of money to be found: a Government Accountability Office study in March estimated the 80 or so business tax exemptions added up to about $181 billion in 2011, roughly the same size as total corporate tax revenue.

Yet each of these corporate tax breaks is worth a fortune to the industries they benefit—and fierce campaigning is under way, employing teams of lobbyists in Washington, to keep them in place.

"It is going to be practically impossible to get the rate down," said Howard Gleckman, a fellow at the nonpartisan Tax Policy Center. "No one wants to cut their preferences."

Since the last reduction in United States corporate tax rates, in 1986, other nations have reduced their own business rates; corporations complain this is putting them at a sharp competitive disadvantage. In reality, though, few companies pay the official rate.

Many pay at a much lower effective rate, taking advantage of numerous tax breaks and loopholes and using aggressive tax strategies to shift profits to more generous tax territories abroad. Among the companies benefiting from lower effective rates is General Electric, which has paid total corporate taxes—federal, state, local and foreign—equal to 17.9 percent of its cumulative $81 billion in earnings over the last five years, according to an analysis by S&P Capital IQ.

FedEx paid 20.1 percent, Amazon.com 6.6 percent and Ford Motor 4.2 percent. G.E. said its tax rate was unusually low over this period because it had big losses during the financial crisis. FedEx said it took advantage of temporary incentives to make new investments.

Congress, under relentless pressure from business interests, has allowed corporate taxes to dwindle as a source of revenue. In 2012, they amounted to about 1.6 percent of gross domestic product, half the level collected in 1970. By comparison, the individual income tax generated 7.3 percent of G.D.P. last year.

Many industrialized countries collect more than that percentage, although they, too, have to contend with a competitive globalized world where multinational companies can shift profits beyond the reach of local tax authorities.

"Income is increasingly difficult to nail down," said Aswath Damodaran, a finance professor at New York University. "It is like nailing jelly to the wall. And the problem is only going to get worse rather than better."

The two biggest corporate tax breaks are for accelerated depreciation of machinery and equipment, which saved corporations an estimated $76 billion in 2011, and deferral of foreign source income.

Deferral allows big multinational corporations to postpone paying United States taxes on foreign earnings until they bring those profits home. It saved them $41 billion in 2011. American corporations had amassed about $1.7 trillion in offshore profits by last year, analysts at JPMorgan Chase estimated, a figure that is now believed to be almost $2 trillion.

Mr. Obama wants to claw some of this back by imposing a minimum tax on foreign earnings.

A new coalition called LIFT America started a campaign last month to prevent that from happening. They want the United States to adopt what is called a territorial system, in which companies pay taxes on profits only in the country where they were earned, in line with the practice in many other nations.

"It is not a tax that our competitors pay when they bring profits home to their countries," said Claire Buchan Parker, a spokeswoman for LIFT America, which includes international powerhouses like Coca-Cola and Hewlett-Packard.

Last month, the Business Roundtable, which represents mostly big businesses, started a separate lobbying campaign, called Home Court Advantage, to adopt a territorial tax system as well as a lower rate.

Another coalition, called Reforming America's Taxes Equitably, or Rate, which includes more domestic-oriented companies like AT&T and Macy's, is less interested in getting rid of the United States' worldwide tax system. Instead, it is concentrating on lowering the corporate tax rate, proposing to pay for it by ending many domestic tax breaks. But it will not say yet exactly which loopholes its members would surrender to make up the lost tax revenue.

To make the numbers work, economists say, Rate's plan would inevitably need tax revenue from the multinationals' foreign earnings—revenue that the multinationals are eager to save for themselves, of course.

"We have different coalitions with different interests," said Edward D. Kleinbard, former chief of staff of Congress's Joint Committee on Taxation. "That makes it difficult for the coalitions to speak with one voice."

In Congress, Mr. Camp, the Michigan Republican who runs the Ways and Means Committee, favors a 25 percent corporate tax rate and elimination of the worldwide system. He wants to pass a bill out of the committee this year, and Speaker John A. Boehner says he will give priority to any debate about rewriting the tax code.

"Companies have testified before the committee that they are willing to put everything on the table in tax reform," Mr. Camp said in an e-mailed response to questions, suggesting there would indeed be enough revenue generated by closing loopholes and generally tidying up the tax code. But companies and trade groups are bombarding the committee with outside comments, underlining the difficulties of getting everyone to agree on a formula for change.

For example, the Retail Industry Leaders Association wants to eliminate all loopholes, because retailers benefit from few tax breaks. But the Chamber of Commerce and the National Association of Manufacturers are fighting to preserve many of them, including the research and development tax credit, which yielded $8.3 billion in tax savings in 2011, according to the G.A.O.

The National Association of Water Companies wants to protect the tax deduction on borrowing, another preference that saves companies billions. And a trade association for oil and gas suppliers, Western Energy Alliance, is defending tax subsidies for fossil fuels against Mr. Obama's budget proposal to end them, potentially raising $44 billion over 10 years.

Another powerful constituency—made up of businesses that are not organized as corporations—is preparing to fight for its turf, adding to the opposition to an overhaul. After the previous tax reform in 1986, thousands of companies shifted to this status; these pass-through entities still benefit from many corporate tax breaks but often pay a lower personal rate of taxation. Their numbers have increased so much that they now account for more than half of net business profits, according to the Tax Policy Center.

They are now worried that they will be singled out to help pay for a corporate tax overhaul.

According to a study last year by the Joint Committee on Taxation, even if Congress eliminated many corporate tax deductions, it could not push the official rate below 28 percent. (At the time, Mr. Camp described the study as incomplete, and some analysts say there may be loopholes to close beyond the official list.) Still, given corporations' opposition to getting rid of their panoply of cherished tax breaks, any rate cut could be vanishingly thin, undermining the whole point of the exercise.

Robert S. McIntyre, director of the left-leaning Citizens for Tax Justice, says he thinks most of the interest in changing the corporate tax system is actually being driven by entrepreneurial lobbyists who sense an opportunity to generate extra business from various interest groups. If any bill managed to get through Congress, he argues, it would happen only because lawmakers had ignored the prescription to keep the overhaul from losing revenue.

"They don't care about the deficit," he said. "They just care about their own corporate taxes."